VATLive > Blog > Europe > Brexit – what happens if no UK-EU trade deal?

Brexit – what happens if no UK-EU trade deal?

  • Sep 7, 2020 | Richard Asquith

Progress on a UK-EU post-Brexit Free Trade Agreement neogtiations (FTA) are faltering. It is looking increasingly likely that the UK’s transition period out of the EU trading structure after 31 December 2020 will meet a hard Brexit. What areas could an FTA cover, and what happens if no trade deal is concluded?

In the case of no deal, it certainly means weaker UK and EU economies. There will also be some shortages in UK shops and truck hold-ups. Perhaps more importantly, a break in political relations at a critical time as the UK and EU look to tackle COVID, and complex global relations.

1. Goods imports

Effect of no trade deal

Tariffs and quotas

Without a deal, tariffs and import quotas will apply, making trade more expensive and restricted in sensitive sectors. The UK’s Global Tariff has set levies on global imports, including from the EU from 2021. But the EU would be obliged to follow its Common Customs Tariff under the World Trade Organisation most favoured nation rules. This would include 10% tariffs on cars and 11% on agriculture coming from the UK.

VAT

UK businesses will lose many VAT compliance simplifications as the UK leaves the EU VAT regime. This will require extra VAT registrations for UK companies, and the payment of import VAT on goods coming into the UK or EU for the first time. The UK has committed to introducing a VAT postponed accounting system. UK traders will also need a VAT Fiscal Representative in up to 19 of the EU27 member states. Northern Ireland Brexit VAT rules are different. 

Rules of origin

To qualify for any negotiated reduced tariffs, traders would have to prove the origin of their goods going into the UK or EU. This prevents goods being rerouted from third countries to avoid tariffs. Complying with the rules of origin could add up to 15% to costs. If there is no-deal, then full tariffs apply anyway.

Customs declarations

With or without an FTA, full customs declarations will be required at UK and EU ports. The UK will defer customs declarations until 1 July 2021. However, an FTA is looking to recognise simplifications such as the Authorised Economic Operator schemes. There will be free Northern Ireland customs declarations help for UK businesses sending goods from GB.

Safety and security declarations

Irrespective of any FTA, shippers will need to complete full declarations of consignments in advance. The UK will waive these on EU to GB movements until 1 July 2021. But they will be required for UK to EU and GB to NI. Businesses will be required to prepare for safety and security declarations in all scenarios.

Regulator controls agriculture, chemicals and industrials

Full regulatory controls will apply on imports to the UK or EU. The only easement an FTA would offer is a reduction in the number of shipments checked with some mutual recognition of standards.

2. Services

Effect of no trade deal

Freedom of establishment

Service businesses would no longer be free to offer their services to businesses or consumers in each other’s territories from their UK or EU base. They may instead have to incorporate locally and comply with local regulations such as rules on the nationality or residency of directors or caps on foreign-held equity. 

Financial Services

No agreement on equivalence (requireing the UK to tracking EU regulations) would hit financial services – banking and insurance – hardest. The dominant UK sector will lose its pan-EU passporting rights to local customers. UK businesses will have to establish EU subsidiaries, with senior management, to keep on selling. Even any equivalence recognition would not replicate the freedom of passporting as bank credit/deposits and insurance would be highly restricted.

Professional qualifications recognition

Professional qualifications from the EU or UK would no longer be recognised by the other side. This would limit the opportunities for cross-border engagements. This covers: lawyers; accountants; bankers; actuaries; engineers; architects and many more. The EU has limited interests and powers in this area, so may leave it to the individual member states to negotiate with the UK.

Business mobility

There will be restrictions on UK or EU businesses making short-term trips to customers for paid-for engagements. There is likely to be new VISA requirements and restrictions on the type of services they may offer, too.

Fisheries

Without an FTA, control of national waters for fishing rights return to the UK and EU. This would present major problems for both sides: UK is a major exporter of fish to the EU that may impose tariffs; and the EU has large French and Spanish fishing sectors with current UK waters access. The UK wishes to set in motion a fast return of control of its waters to local fishers. The EU is holding out as it wants continuing, albeit reduced EU access to UK waters. Fishing has become a bargaining chip for the EU on many other issues.

3. Law & Justice Effect of no trade deal

 

The UK will lose access to the EU legal cooperation agreements and mechanisms such as the arrest warrant and criminal databases. Any agreement would have restrictions on replicating this since the UK refuses to be bound by the European Court of Justice.

4. Transport

Effect of no trade deal

Road hauliers

UK or EU road hauliers would no longer be recognised in each territory and would not be automatically allowed to ship goods. There may be some limited quota-restricted numbers allowed. Driving licences rights would also be restricted. In the 2019 Brexit planning, both sides did make some no-deal compromises which could be repeated if no-trade deal happens. An FTA would seek to allow bilateral access to freight drivers and carriers.

Air traffic

There would be limited rights granted in a no-FTA situation under international agreements. But there would be problems for intra-EU or UK services from airlines or air hauliers. The EU aviation safety system would no longer apply to the UK, as well as EU agreements with many other countries. In the run-up to 2019 no-deal Brexit, the UK and EU did agree to a temporary continuation of agreements to avoid disorder. 

Rail

Operators of services between the UK and EU would need licenses on both sides to continue. The UK has said it would hold over for 12 months the continuing recognition of EU licenses. 

5. Data

Effect of no trade deal

GDPR

Without a deal, the transfer of data from the EU to the UK would be limited since the UK regime will not be recognised. The UK has incorporated the EU’s GDPR regulations into UK law, and would have to apply for recognition as an adequate system.

6. EU programs Effect of no trade deal

 

The UK will no longer participate in a wide range of EU programs, including being able to apply for funding support. This includes Euratom and Horizon. Although the UK is committed to replacing these activities with domestic programs.

Explore more content like this in our Brexit hub


VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He can be contacted at: richard.asquith@avalara.com. He is part of the European leadership team which won International Tax Review's 2020 Tax Technology Firm of the Year. Richard trained as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.
VATlive newsletter

Sign up for our free newsletter stay up-to-date with the latest tax news.

VAT Voice Webinars


Stay ahead of the curve, sign-up to VAT Voice, our essential monthly round-up of VAT, GST and legislation news